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Spire comments on the Asia-Pacific outlook

Channel News Asia Prime Time Morning
27 August 2010

Interview with Spire’s Group Managing Director Leon Perera
Spire comments on the Asia-Pacific outlook: Japan in danger, emerging
Asia on track

Synopsis
Channel News Asia: This week, the yen hit a 15 year high against the dollar and a 9-year high versus the euro. Is Japan’s export driven economy in danger of another recession?

Spire: Recession is a realistic danger in Japan. Latest figures for GDP growth in Q2 are close to zero. Japan has been hit by a double whammy – firstly, weak global demand for its exports – most of its growth in the last ten years has been export driven. And secondly a very strong Yen, which hits Japanese SMEs that account for the bulk of employment. Big Japanese manufacturers may not be as affected by the strong Yen as they have restructured their supply chains to locate many activities outside Japan.

The damage to SMEs also undermines consumer confidence and spending, which is the largest chunk of Japan’s economy, even if it has not been a growth engine recently.

Weighing on consumers even more are political concerns – for example the failure of the DPJ government to deliver on economic reform and comments by the former Prime Minister about the likelihood of increasing the sales tax.

Channel News Asia: Will Japanese officials intervene in the market to weaken the yen?

Spire: The responsibility to intervene falls on the Bank of Japan, which is under pressure to do something about the Yen. Most likely it will wait for more Q3 data on GDP before rushing into quantitative easing measures, since the Q1 GDP numbers were strong.

Channel News Asia. Can Asia still rely on China as the new engine of global growth?

Spire: Yes and no. China is still too small to tilt the world in a different direction – its GDP is still only around 15% of the USA and EU combined.

Moreover the Chinese economy will itself be growing more slowly as a result of weaker demand for its exports.

In Asia the impact of China will be greater than in the world at large though even here it varies by sector.

For commodities like energy and base metals, China does have a huge impact by itself. However for other sectors, China alone is not enough to push Asia in a different direction – for example services like banking, aviation, telecommunications or manufacturing sectors like cars, ICT and apparel.

Fortunately the other big emerging economies in Asia are also doing well, for example India and Indonesia. China is not the only game in town.

Channel News Asia: In the past five weeks, we have seen the unrelenting flood of negative economic data out of the US. Has the risk of a doubledip recession increased?

Spire: It has, due to:

Unemployment at levels close to historic post-war highs for the US (right now at 9.5%) – with a lot of consumer spending going on imports
The fiscal stimulus effect tailing off
The housing market being still weak, with negative indicators on pricing and housing starts
Certain sectors seeing regulatory developments affecting investment flows – oil and gas and healthcare for example

We always predicted much slower growth in the second half of 2010. On balance the weak growth scenario of 0-1% is more likely than a recession.

Channel News Asia. Later tonight, US second quarter gross domestic product growth is expected to be revised down sharply from the initial 2.4 percent. What’s your expectation?

Spire: I would expect something around 1.5%, as a result of latest figures on net imports, as well as updated construction and other figures.

Channel News Asia: The US government stimulus boost is fading. Do we need a further dose of fiscal spending?

Spire: We do, as concerns about growth outweigh other concerns such as inflation. Without the economy returning to health, there will never be a recovery in government revenues necessary to reduce the long-term fiscal deficit, as happened in the Clinton years.

However with support for small government growing stronger and the Mid-Term elections looming in November, it is unlikely that Congress will pass any major fiscal stimulus measures this year.

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